My most recent books are the Leader's Guide to Radical Management (2010), The Leader's Guide to Storytelling (2nd ed, 2011) and The Secret Language of Leadership (2007). I consult with organizations around the world on leadership, innovation, management and business narrative. At the World Bank, I held many management positions, including director of knowledge management (1996-2000). I am currently a director of the Scrum Alliance, an Amazon Affiliate and a fellow of the Lean Software Society. You can follow me on Twitter at @stevedenning. My website is at www.stevedenning.com.

Why We Don't Yet See A "Whole Foods Economy"

The ancient Romans studied the entrails of sacrificed animals to predict the future.

The nation’s economists held their breath this morning, waiting for the monthly job numbers to come out, much as the ancient Roman soothsayers gathered round the entrails of sacrificed animals.

“It’s not what I call a ‘Whole Foods economy’, that is, organic and sustainable,” said Tony Fratto, Partner at Hamilton Place Strategies, speaking on CNBC’s Squawkbox before today’s disappointing job numbers came out (120,000 new jobs instead of the expected 200,000+):

“It’s hard to say this is a very good economy… It’s still supported by a lot of fiscal spending and zero interest rates and whatever quantitative help we’re getting on the monetary policy side.”

As Fratto was pointing out, it hardly mattered what the job numbers were. The reality is that the economy is merely limping along on various kinds of life support:

A tripling of the Fed’s balance sheet provided large quantities of very cheap money to big business and banks.

Firms are sitting on mountains of cash, perceiving “lack of demand”.

Overall, the economy’s output is barely greater than it was before the crisis. In per capita terms, it is negative.

Whatever the rate of new job creation, the level of employment is still down.

For the first time since the Great Depression of the 1930, four years after the onset of recession, unemployment has exceeded 8 percent and economic output is barely greater.

Fratto continued:

“We don’t have that economy that’s organic, sustainable, growing on its own. We’re seeing signs of that but it’s not strong enough yet… This isn’t an economy that’s running on its own. We keep talking about the rate of economic activity, but we’re not really looking very closely at the levels of economic activity. The same thing with jobs. We keep focusing on monthly job creation. We want to see that number get stronger but the levels are really bad. That’s reflected in the rate and it’s reflected in some of the other measures of unemployment.”

An economic Phase Change, not a recovery.

What most economists haven’t yet grasped is that that the economy is not in a recovery. It is in a great economic Phase Change.

We have, as Joseph Stiglitz has written, misunderstood our situation. We are not as well off as we thought we were. The economic pain that we feel is the pain of a great economic Phase Change.

Just as the phase change in the Great Depression was a transition from agriculture to manufacturing, so the economic pain we are feeling is a transition out of the industrial economy.

But into what?

Stiglitz sees it as a transition from manufacturingto a service economy. A service economy is certainly one looming possibility for the US economy, but a service economy per se is unlikely to be an American success story. If all American workers do is mow lawns, cut hair, export raw materials, and market and sell goods manufactured in other countries, the wealth of the nation will decline.

Instead the needed transition is from an industrial economyto a Creative Economy, as described in Richard Florida’s classic book, The Rise of the Creative Class(2003). The Creative Economy is one in which both manufacturing and services play a role. It is an economy in which the driving force is innovation. It’s an economy in which firms focus not on short-term financial returns but rather on creating long-term customer value based on trust.

The challenge ahead

Most large firms of today are ill-equipped to compete in the emerging Creative Economy, in which globalization and the shift in power in the marketplace from seller to buyer have put the customer in charge. Most large firms still have a factory mindset oriented to economies of scale. They are focused principally on maximizing short-term shareholder value. They are not organized for continuous innovation. This way of managing is unable to mobilize the full creative talents of their employees. The rate of return on assets and invested capital has been in steady decline for decades.

Many large firms are currently over-capitalized and unable to find productive uses for the money in a stagnant economy. Lending more money to these firms will do little to help revive the struggling economy. So long as these firms adhere to the goal of maximizing shareholder returns—which even Jack Welch says is “the dumbest idea in the world”—they will have great difficulty in operating effectively in The Creative Economy.

We know what to do

Americans in general are gradually coming to understand what has happened, perhaps more rapidly than the professional economists. That’s because they are seeing what’s occurring see in the workplace and the marketplace on a daily basis, rather than studying the aggregated monthly job numbers.

To flourish in the Creative Economy, a radically different kind of management needs to be in place, with a different role for the managers, a different way of coordinating work, a different set of values and a different way of communicating. This is not rocket science.

What is needed now is a realistic understanding of what is actually happening in the economy, and a sharp focus on the opportunities offered by the future. We need a clear understanding of the nature of the journey that we are negotiating and intelligent action to get through the transition as quickly and painlessly as possible. The Creative Economy is a huge opportunity that awaits us.

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As you noted, the US economy is failing, quite badly. Consequently I would have phrased your last line as “The Creative Economy is our last chance.” Change, transformation as you call it, is standing on your doorstep and it is not a choice. Either you go at it pro-actively, or you wait for others to make the decisions for you. Opting for the latter is unlikely to work to your advantage.

What also strikes me is that your description of the creative economy differs/conflicts with other descriptions of the creative economy/creative class that I’ve come across, in that it includes manufacturing. As such I would sooner call it ‘the balanced economy’ than the creative economy.

On your first point, the Creative Economy is not the only option. There is also the option of a decline into a purely service economy, which is not a bright future. It’s a choice that is still being made. So far the signs are not encouraging either in the private or public sector. But that could change once people realize what the choice is about.

On your second point, I think it is more accurate to call it the Creative Economy, because it will depend on creativity and innovation. The assumption that manufacturing is in a separate universe from creativity and innovation is incorrect.

To call it “the balanced economy” would be to lose sight of the main point that we are not merely talking a combination of “manufacturing in the industrial economy” and “services run in the traditional manner”. This is a fundamentally different way of running all organizations and the economy.

Whether the cash is here or there, the end result is the same: it’s not being used constructively, because of “lack of demand.” Until firms learn how to create their own demand, the status quo will remain.

I like this creative economy since it -focuses on innovation and not short-term returns that only benefit shareholders. - It personalizes the worker and makes them an individual, not a cog in the machine. -It rewards diversity, adaptation, thinking outside of the box and passion. -It seems to be a progressive economy and not a conservative one. -Finally, it’ll be the first time in history where these corporations will be give a damn about Joe-Six pack thinks when he logs on Twitter and talks about them.